Thanks to Microsoft, Apple, Nokia lawsuit/licensing triple team, OEMs might be tempted to take the deal

The Vergeis citing "sources familiar with Microsoft's plan" as saying that Windows Executive Vice President (EVP) Terry Myerson is considering offering Windows RT and Windows Phone for free. The move could be a game changer for Microsoft, which is struggling in key mobile markets including budget laptops, tablets, and smartphones.

I. Free at Last?

Some viewed Microsoft's decision to offer free upgrades to Windows 8.1 for Windows 8 users as a shift in direction; others argued that the release was analogous to a service pack, which Microsoft has traditionally released for free.

Needless to say, offering an operating system to OEMs for free would be a far greater seismic shift for Microsoft. The "official" MSRP is $120 USD for Windows RT, but the rates that Microsoft sells it to OEMs at are individually negotiated. According to a report by VR-Zone in mid-2012 Microsoft was asking $80-95 USD per license (with the median asking price around $85 USD) for Windows RT tablets. Following poor pickup of Windows RT, Microsoft reportedly cut licensing fees to $30-45 USD by June 2013, according to reports by ComputerWorld and The Wall Street Journal.

Microsoft current charges anywhere from $5 to $30 USD per Windows Phone license.

In Jan. 2012, Chinese phonemaker ZTE Corp. (SHE:000063) revealed in an interview with TrustedReviews (UK) that Microsoft was charging between $20 and 30 USD per Windows Phone 8 license. Larger OEMs have been rumored to get more favorable deals; Reutersreported in June 2011 that Samsung Electronics Comp., Ltd. (KSC:005930) (the world's biggest smartphone maker) was paying only $10 USD per Windows Phone license.

Aside from ZTE's apparent tip, the closest to confirmed licensing rate info we have on Windows Phone comes from financial filings from Finnish phonemaker (and Windows Phone maker) Nokia Oyj. (HEX:NOK1V). While there was a two-way flow of money between Microsoft and Nokia (Microsoft paid Nokia around $1B USD to use Windows Phone over Android), the net direction of the flow was to Microsoft.

A 20-F filing by Nokia for fiscal 2012 revealed that Nokia was expected to pay Microsoft €500M ($688M USD) more than it received through the end of 2016. Given that Nokia shipped 7m Windows Phones in Q1 2013, 7.4m in Q2, and 8.8m in Q3, that works out to something in the neighborhood of 32-35m expected sales for 2013. Assuming no growth (an unrealistic assumption, as Nokia doubled its Windows Phone sales from 2012 to 2013), sales should work out to 125 - 150 million units through 2016. That's about $5 a license -- at most -- likely even less (of course, Nokia's devices unit later would be sold to Microsoft scrapping that deal).

But in October the rumor mill was buzzing following a Bloombergreport that Microsoft offered HTC Corp. (TPE:2498) free Windows phone licenses, if it commits to a large volume of handsets (perhaps exclusivity).

II. Why "Free" is Good for Microsoft's Bottom Line

In Q3 market analysis form Interactive Data Corp. (IDC) indicated sales of 8.9m Windows Phone units (indicating Nokia accounted for basically all of the platform's sales). Windows RT -- the version of PC Windows that runs on CPUs bearing ARM Holdings plc's (LON:ARM) titular licensed architecture -- moved 200,000 units in Q2 2013 (about half a percent of the 51m+ tablets that were sold in Q2). It's safe to assume that Q3 sales were bad or worse, given that some OEMsbailed on Windows RT with the launch of Intel Corp.'s (INTC) Bay Trail platform.

So Microsoft’s net loss in revenue had it offered Windows Phone and Windows RT for free to OEMs would have been around $50M USD -- a drop in the bucket for a company that made $5.24B USD last quarter in net income.

As the fall of RIM/BlackBerry demonstrated, it's absolutely vital to stay relevant in the mobile consumer market, in order to stay relevant in the enterprise market. So it's a smart move for Microsoft to sacrifice roughly 1 percent of its net earnings if that expenditure will gain it ground in the mobile market.

That brings us to a final point -- will it work?

III. Will OEMs Quit Android to Save Money?

Currently there's only one major alternative to the Windows OS family in terms of a third party platform -- Google Inc.'s (GOOG) Android OS. Likewise on budget laptops the only widely adopted alternative is Chrome OS. Chrome OS and Android are "free" to OEMs in the sense that Google doesn't collect license fees and offers to share advertising revenue with the OEMs. However, these operating systems aren't truly free in the long run.

The question is whether a free Windows OS would be cheaper. You know with certainty that Microsoft won’t sue you, so that reduces your potential licensing fees to payments/lawsuits costs with Apple and Nokia. Further, you're safe from most software patents, as Apple and Nokia have committed to licensing agreements with Microsoft.

Thus the only expense you have is potential payments on hardware infringements or infringements on design patents. As the Nokia v. HTC conflict shows, this can still be an issue -- particularly if you buy your chips in jurisdictions where licensing deals from chipmakers don't transfer to their customers (e.g. Taiwan). However, even if Windows Phone/Windows RT OEMs are forced into small licensing fees regarding hardware patents or small redesigns to escape design infringement claims, this still will likely be half what a top Android OEM today is paying.

The Nokia, Microsoft, and Apple patent licensing/lawsuit triple team may make the "free" Windows Phone the only financially feasible option for some OEMs, like HTC. [Image Source: NeoWin]

Simply put together Microsoft, Apple, and Nokia are triple teaming phonemakers. This approach may eventually make getting the licenses necessary to sell a smartphone or tablet so expensive that Android becomes financially infeasible for top OEMs. And now Microsoft deftly maneuvering to position itself as a seeming knight in shining armor, and offering "free" licensing -- if you use its OS.

Smaller Android OEMs who might be under less legal pressure invariably will have to weigh these financial benefits against the cost of redesigning for a new operating system and the cost to users of having a more limited app selection.

But overall free licensing could be a game changer to Microsoft's mobile campaign, and help Microsoft sustain profits in the long term in the enterprise sector, which current drives most of its revenue.

No...because of the obvious fact that Android is far and away the most popular market segment, and has such a magnificent ecosystem around it.

The better question to ask is probably whether or not any of the OEMs would *not* take advantage of a free Windows platform. I think that they're likely to all test those waters out and at least see how it goes...they'd have little to nothing to lose. Especially if they could just re-purpose all or most of existing models to use for their Windows offering.

The OS a vendor offers on their devices isn't an either/or thing. Well, other than Apple. There's no reason that all the OEMs can't add a Windows offering or two to their lineup that's otherwise all Android. Suggesting, though, that some OEM is just going to dump the proven king Android for the Windows upstart is just cray cray.

"The better question to ask is probably whether or not any of the OEMs would *not* take advantage of a free Windows platform. I think that they're likely to all test those waters out and at least see how it goes... they'd have little to nothing to lose . Especially if they could just re-purpose all or most of existing models to use for their Windows offering."

You have no clue how product development works. Zero. They have everything to lose. All the hardware and software development time, testing, regulatory approvals, technical support, product packaging and distribution, marketing and advertising, all these things are up-front costs that they will lose if the product is a flop.

Why take on that large financial risk when a much more mature, more popular, established player already exists? Particularly when that established player has a way more robust software ecosystem? There is no compelling reason whatsoever for OEM's or consumers to choose Windows Phone over Android.

quote: Why take on that large financial risk when a much more mature, more popular, established player already exists? Particularly when that established player has a way more robust software ecosystem? There is no compelling reason whatsoever for OEM's or consumers to choose Windows Phone over Android.

Because, for companies such as HTC, using Andoid is becoming a legal risk for them.

quote: Because, for companies such as HTC, using Andoid is becoming a legal risk for them.

There's no realistic alternative for these companies though.

Hell HTC already makes Windows Phones. Do you think the pitiful number of sales those models get could sustain them?

And now that Microsoft owns Nokia, there's even less chance other OEM's will invest in the Windows Phone/RT platform. Nokia is always going to get the most money, the most support, and the most favored status from MS.

quote: Hell HTC already makes Windows Phones. Do you think the pitiful number of sales those models get could sustain them?

True, but they've hardly made a push for the phones using the Windows Phone platform. The last phones that HTC released with Windows Phone are over a year old, and only 2 models. Besides, if the ongoing issues with their use of Android continue, then at least HTC still has the ability to exist as a business with Windows Phone.

quote: Hell can you blame them? After being the only third party OEM to even bother making a Windows Phone, Microsoft then sues and trolls the hell out of them.

Yes, you can blame them. Their Android litigation issues have been ongoing for years. They've not changed anything to protect themselves from the underlying issue. They purchased S3 to help their patent portfolio. That's about it.

HTC, Samsung, Huawei, LG, Dell, Alcatel, as well as Nokia have all released Windows Phones. How are HTC the only 3rd party OEM to make a Windows Phone?

HTC are not the only company sued by Microsoft. They were also sued by Nokia for use of Nokia's IP in their chips. HTCs Windows Phones were also included in the UK injunction. This has nothing to do with HTCs use of Android.

quote: HTC, Samsung, Huawei, LG, Dell, Alcatel, as well as Nokia have all released Windows Phones. How are HTC the only 3rd party OEM to make a Windows Phone?

While these companies have released Windows Phones in the past or at the least tested the water, none but Nokia is providing ongoing support for them. After Nokia's handset division was bought by Microsoft, they have all seen the writing on the wall and either dropped ongoing support or pulled theirs off the market altogether.

The only way a phone manufacturer will pick up again with windows phone is either (1) Microsoft buys the company, or (2) Microsoft provides ongoing royalty and licensing-free operating systems to them.

(1) is possible with some companies that are in poor shape (not likely for guys like Samsung or LG).

(2) there isn't a hope in hell of tis happening. Microsoft may provide short term free OSs to these vendors, but that free ride will end as soon as Microsoft gets them committed.

Current phone vendors shipping Android phones will continue providing this solution because it is freely available to them without having to pay royalties.

Samsung made ads not only mocking Apple's iPhone, but mocking iPhone users. That is far worse than just mocking a product. And Apple is one of Samsung's largest partners. So why is it ok in the Android world but suddenly bad when it is MS doing it?

Because when MS does it it looks like a sore loser pouting & throwing a tantrum.

It is like the guy who comes in 3rd in a 3-person race pointing at the winner and saying "he can't run - he should not have won!". Everybody looks at the loser as throwing a tantrum like a spoiled kid because he lost.

However when the winner points back at the 3rd place guy and says "he lost because he can't run", everybody looks at the winner and says, yeah, you are right - after all you won the race. Sure the winner is rubbing the loser's nose in it, but he has won the right.

Agreed that chrome hasn't even gotten in the race, however I only see Microsoft knocking them as yet another sign that they are butthurt from getting it kicked by not only Android but iOS as well. Sore losers tend to do that.

But sore losers also try sucking in OEMs by giving away their lame software since they are already well aware that those OEMs certainly won't actually pay them for it.

So is Google a butthurt sore loser since it gives away Android? When Samsung introduced a$250 Chromebook after its initial offerings were knocked as underpowered and overpriced was it actuation like a butthurt sore loser? These companies were making decisions based on market forces, so is Microsoft.

Windows Phone is not succeeding, MicroSoft does not have to be a 'butthurt sore loser' to realize it needs to change its mobile business model.

Not sure why you keep harping about chromebooks. Attempting to derail the topic doesn't change the fact that Microsoft has one sore ass from all of the vendors that had licensed their software jumping ship when they bought Nokia's hardware div.

Are they butthurt?

They sure are by posting a video that compares a network appliance with a full blow laptop computer when anybody with half a brain knows they are not the same thing. Is ChromeOS a stand-alone operating system. No. So frigging what?

Why are they butthurt?

They are sitting in 3rd place in the most lucrative mobile device market. Apple and Google's hardware partners are all taking turns raping them in mobile sales. They are so butthurt they have to try and lure in hardware vendors with free Windows licenses. And we all know what happens to free Microsoft licenses when the next release comes out don't we ;)

Why should Google have a sore rump for giving away Android? Android is and always has been OPEN SOURCE. Just like LINUX. They have more vendors using their ALWAYS FREELY AVAILABLE software than any other MOBILE OPERATING SYSTEM vendor in the world. About the last thing anybody can call Google is butthurt.

Does that make Microsoft's backside just a teensy bit sore? I'm sure it does.

Chromebooks were brought up by another post way up the thread, not by me. And Google is not marketing Chromebooks as a network appliance, they are marketing them as a computer. The aim is to compete with Windows. From Google's website"The Chromebook Family. Starting at $199. A new type of computer with everything built-in." ChromeOS is competing with Windows, is MS not supposed to respond?

I did not call Google butthurt, I happen to think their business model is genius. However, I don't think MS is butthurt either (and that is the absolute last time I will type that word), they are adjusting their business model because it is not working. Something Google has also done often.

No, tell me what happens to free Microsoft licenses when the next release comes out since I don't recall MS ever offering free OS licenses. Are you telling me that if Samsung signs on to make more Windows phones they are not smart enough to craft a contract that protects their investment?

I don't understand the need to personalize business decisions. If MS changes its strategy to offering free OS licenses it won't be because it is angry, it will be because it thinks it can make more money that way.

quote: Windows Phone is not succeeding, MicroSoft does not have to be a 'butthurt sore loser' to realize it needs to change its mobile business model.

I don't think most of us WANT to see Windows Phone succeed frankly.

Microsoft has dominated the desktop OS for decades now. And they have often used their market position in...questionable ways.

Do we really want to see that all over again on smartphones and tablets? Does Microsoft need TWO near monopolies? I don't see any possible future where that results in a better experience for the end user.

quote: Microsoft has dominated the desktop OS for decades now. And they have often used their market position in...questionable ways.

Do we really want to see that all over again on smartphones and tablets? Does Microsoft need TWO near monopolies? I don't see any possible future where that results in a better experience for the end user.

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Never fear bro. They have to get past Google and Apple to do that and my friend just ain't gonna happen.

The difference is that Microsoft does not have to actually PAY for Windows Phone while its competitors would. The reason every body else jumped the Microsoft ship after this is they still would have to pay Microsoft to Pay for Windows Phone. That puts them at a competitive disadvantage against Nokia in the same market.

Motorola being owned by Google does not place anyone else at a disadvantage since everybody, including Motorola, pays the same for Android --- nothing. No competitive advantage as evidenced by Samsung running Android and still being the largest selling smartphone vendor in the world.

I know *exactly* how product development works. And product marketing.

I also know that there's a high likelihood that they could re-purpose existing hardware for their initial Windows offerings. Windows phones run on the same hardware platform as Android. So there's not any real reason to believe that the initial effort would be pretty nominal - they're not going to have to engineer a phone from scratch...they can take an existing phone, put Windows on it, test the software on that pre-existing hardware, and roll it into production.

That's a vastly different scenario from having to build something new from scratch...and it's the kind of minor intra-product variation that happens *all the time* in many industries.

Product packaging and distribution is already done. Regulatory approval doesn't change with the OS on the device. For your first foray into the new OS, train a small portion of customer support...if it flops, you won't need to train more. And marketing? Enter the market with mid to low-end devices. The kind that don't really get marketing...they show up in the store and people see them. Samsung doesn't do *any* marketing for, say, the Galaxy Express, for example. But they stock the shelves, and the product sells. Do the litmus test first to see if the market picks up the product variation, and if it does invest more in a higher-end product with dedicated marketing.

quote: Why take on that large financial risk when a much more mature, more popular, established player already exists?

Because stagnation can be dangerous, and you can get caught with your pants down if your competitors capitalize on a market opportunity that you let go by. The financial risk of putting out a low-to-midrange product, repurposing existing hardware to do so, is almost certainly a rounding error compared to whatever else is going on in the company. And if it isn't...you may be in too much trouble already to survive in any case.

quote: There is no compelling reason whatsoever for OEM's or consumers to choose Windows Phone over Android.

If this were the case there would be 0 Windows phones on the market and/or 0 of them getting sold. Nokia, at a minimum, would disagree with you on that point. And if making the OS free to the OEM winds up with a phone that costs the consumer substantially less, then that's one huge compelling reason for the consumer to buy one right there. If you're in the market for a midrange phone and you can buy a Galaxy S2 for $200, or a Windows phone with the same specs for $150, that 25% difference in cost is pretty GD compelling. Especially if you aren't married to some app that only exists on Android...and/or if you happen to really like the Windows UI and/or other native features. I've made it known that I hate the Metro interface on a PC...but it might be the bee's knees on a phone.

At any rate, your arguments are flat. I've been there and done this, and this is exactly the kind of small, mitigated risk that an OEM should be willing to take.

I think that's just wishful thinking on the authors part. Seriously it's crazy to think an OEM would dump Android. For what? An alternative that NOBODY is buying outside of the Nokia 520/521 in third world countries?

Your initial post states that no one is buying Windows Phones, other than in 3rd world countries. Its double-digit market share in some European countries, including the UK, shows that this is simply not true.

What I do think is that they'll possibly adopt Windows Phone as a strong second tier, which can fill in, in certain markets (e.g. the U.S.) if bans land. Some OEMs (e.g. Sony) are safe due to preexisting deals.

Are you honestly saying that if, say the Galaxy S3 and Note II are banned next Spring (which I expect it will be, unfortunately) that Samsung won't at least consider switching its entry level U.S. product to Windows Phone?

quote: Again, that marketshare growth is entirely because of the 520/521, just like I said!

Second, as to this, I find this argument kind of nonsensical, given Android's initial gains were on the low end.

When the HTC Dream/G1 launched it was a nice phone and all, but it was by no means on par hardware-wise with the best from Nokia, Palm, or Apple. Instead it offered a good price and a fresh look.

The key was that first part -- price. Android won market share by first attacking the budget end.

Microsoft is doing this relatively successfully, as it's raised the base price of Android enough with licensing (together with Nokia and Apple) that it's hard to have a competitively priced Android to face off against the 520/521. BlackBerry should go under within a quarter; most of its sales in recent quarters have been BB7 consumer devices in emerging markets(read, not enterprise devices as most businesses are dropping BB).

Microsoft is well positioned to secure most, if not all of this business.

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I expect Microsoft to pick up some of that business on the high end, as well.

And now that it/Nokia (+ Apple) have pushed HTC into money losses, HTC should either switch to Windows Phone or go under. Either way Microsoft should gain sales.

Samsung won't switch to Windows Phone wholesale (or at least it's very unlikely), but depending on lawsuit outcomes it is likely to at least launch some U.S. Windows Phone product.

But I think Microsoft will continue to grow sales-wise, simply because it offers a good product, has greater differentiation for those wanting something different, and also is playing very dirty in the patent game, and slowly succeeding.

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But hey, whatever, I'm sure Microsoft would be fine if you're right and Android continues to dominate. It makes more off Android still. Heck, it's expected to get a few billion in licensing fees from Samsung alone this year.

quote: Are you honestly saying that if, say the Galaxy S3 and Note II are banned next Spring (which I expect it will be, unfortunately) that Samsung won't at least consider switching its entry level U.S. product to Windows Phone?

How about we NOT allow product bans and patent trolling to rule the day?

This is what people don't understand about why I have such a big issue with Windows Phone. It's because Microsoft didn't fight Apple! They sided with them, formed an alliance with them, and teamed up against Android OEM's. I will NEVER forgive them for that. They didn't try to compete on their own merits, they didn't care to make a better product. They just went straight into anti-competitive Apple-styled bullying of the competition.

It's almost like you guys are cheering for this, as long as it benefits your favored platform. Ugh!

quote: Android won market share by first attacking the budget end.

I don't think Android gained any recognition until Samsung's Galaxy S, which was decidedly not low-end. I'll concede your point that the low-end played a role, no doubt.

But that was then. The market is more matured now. iOS is already at critical mass. Android is still growing, though not as rapidly as before. How much room to grow does Windows Phone even have at this point?

quote: it's hard to have a competitively priced Android to face off against the 520/521.

Why would anyone want to? There's no money to be made selling an $80 phone. The margins are razor thin.

quote: And now that it/Nokia (+ Apple) have pushed HTC into money losses, HTC should either switch to Windows Phone or go under. Either way Microsoft should gain sales.

Hooray!! Let's not win on the merits of our products and marketing. Let's just sue and bully and anti-trust our competition out of business! WOO HOOO!!! GO WINDOWS PHONE.

sigh...

quote: But hey, whatever, I'm sure Microsoft would be fine if you're right and Android continues to dominate. It makes more off Android still. Heck, it's expected to get a few billion in licensing fees from Samsung alone this year.

The fact that the only money Microsoft has ever made off Windows Phone has been from patent trolling and "licensing", speaks volumes about the state of Windows Phone and how "good" of a product it is.

quote: such a big issue with Windows Phone. It's because Microsoft didn't fight Apple! They sided with them, formed an alliance with them, and teamed up against Android OEM's. I will NEVER forgive them for that.

Finally, you admit it. You have just as much iraational attachment to Google as Tony does to Apple. You hatred of MS is based on Google white knighting. Guess what? Google doesn't care one bit about you.

Funny, you accuse me of having an agenda when I am anti-Google for Google's blatent disrespect of privacy laws, but it is ok for you to have an agenda because your favorite company is being picked on? Boo hoo. Google made lots of enemies with IP theft, now it is coming home to roost.

Windows gained popularity simply because they did not restrict licensing to a single hardware platform. That is because Microsoft is primarily a software company. Microsoft quickly realized that if they let third party hardware vendors license their software and published the low level interfaces needed to create drivers and applications, they would get huge amounts of revenue from selling a generalized operating system.

This differs from Apple's insistence on only strictly licensing their software on their own hardware. Sure there have been 3rd parties that tried to create apple boxes, but the legal hoops they had to jump through along with the expensive & very restrictive licensing meant these dried up almost as fast as they showed up on the market.

That said I doubt Microsoft would behave much differently than Apple if people tried to start cloning the Xboxes. Those are a whole other kettle of fish.